As stock-market fireflies fade, fundamentals take centre stage in 2026
Many post-Covid high-flying stocks—fireflies lifted by liquidity and retail enthusiasm—are now burning out, signalling a shift to earnings-led, selective investing in 2026.
Indian equities are entering a far more selective phase in 2026, leaving behind the pandemic-era rally that lifted stocks almost indiscriminately. A liquidity- and retail-fuelled boom has given way to a market where returns hinge squarely on earnings durability rather than momentum. Investors should expect fewer easy winners, wider return dispersion, and stock selection to matter far more than market direction, according to experts.
Between 2020 and 2023, nearly 97% of BSE 500 constituents delivered positive returns, with three-fourths rising more than 80%, according to a Mint analysis of 400 of the BSE 500 stocks. The broad-based rally created a rare environment where momentum often outweighed fundamentals.
The market’s character shifted in 2025, as broad post-Covid gains gave way to selective performance driven by earnings and fundamentals. Nearly 12% of companies that had gained strongly during the earlier period have since seen significant declines. These are the market’s “fireflies" — stocks that surged during the post-Covid rally but are now fading as conditions normalize.
Divergence widens
Even as the benchmark index Sensex rose about 46% over the 33 months from March 2023 to December 2025, firefly stocks slipped into losses or sharp corrections, unable to sustain momentum once growth expectations and liquidity normalized. At the same time, roughly a quarter of BSE 500 stocks managed to outperform during the slowdown, highlighting a widening divergence in returns where solid performance is no longer broad-based.
The correction so far resembles repricing rather than outright value destruction. Among 18 stocks that have corrected 10-30% since March 2023, nearly two-thirds are still trading at close to twice their March 2020 levels. Only the steepest corrections—exceeding 50%—have fully erased pandemic-era gains.
For most of these companies, the market appears to be recalibrating expectations rather than reassessing long-term viability.
Ashish Chaturmohta, managing director and fund manager at Apex PMS, JM Financial, said the reversals reflect aggressive extrapolation of pandemic-era demand.
“Many companies expanded capacity and fixed higher cost structures assuming elevated growth would endure," he said. “But volumes, pricing power and margins normalized far sooner than expected as input costs rose and competition intensified." As demand peaked and operating leverage turned negative, stretched valuations amplified the correction, he added.
Chaturmohta said the uneven returns are rooted in how this market cycle unfolded. The post-Covid rally, he argued, was structurally distinct, with retail-driven momentum overwhelming fundamental discipline. “Valuations raced ahead of earnings durability, and high-growth narratives crumbled when liquidity and sentiment cooled," he said.
Fundamentals rule
Sectoral trends reinforce this view. While fireflies are spread across the market, chemicals and banking, financial services and insurance (BFSI) companies dominate the list, followed by capital goods and consumer durables.
In chemicals, supply disruptions and export-led pricing power drove a sharp earnings and valuation surge that quickly unwound as supply normalized and demand softened, said Puneet Sharma, chief executive officer and fund manager at Whitespace Alpha. In BFSI, rising funding costs, regulatory recalibration and tighter risk assessment exposed weaker players that had previously been priced alongside stronger franchises, Sharma said.
The pattern underscores a decisive shift from liquidity-fuelled breadth to fundamentals-led selectivity.
Sharma said stocks that have held up share a common trait: performance was earnings-led rather than liquidity-driven. Strong balance sheets, disciplined capital allocation and the ability to protect margins across cycles allowed these companies to remain resilient even as conditions normalized.
Divergence, Sharma said, is likely to persist as capital becomes more selective without the support of easy liquidity. Chaturmohta expects 2026 to favour companies with strong earnings quality, cash-flow conversion, and resilient balance sheets, particularly in a macro environment shaped by geopolitical uncertainty and volatile commodity cycles.
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